Delaware's Competitive Reach

Authors


  • This article has benefited from conversations with and comments of Vice Chancellor Leo E. Strine, Jr., Robert Bartlett, Joseph Grundfest, Dale Oesterle, Peter Siegelman, and Michael Weisbach. The article also benefited from presentations at Connecticut, Stanford, and Ohio State. We would like to thank Stephen M. Salley for his invaluable research assistance.

Steven M. Davidoff, Associate Professor of Law, Moritz College of Law, Fisher College of Business (by courtesy), Ohio State University, 55 W. 12th Ave., Columbus, OH 43210-1391; email: davidoff.8@osu.edu. Cain is Assistant Professor of Finance, Mendoza College of Business, University of Notre Dame.

Abstract

Despite its dominance of the market for public company corporate charters, Delaware has come under increasing fire for losing ground to other states in the competition to retain corporate litigation. To test this criticism, we evaluate the selection of governing law and forum clauses in 1,020 merger agreements between public firms from 2004–2008. This sample provides a clean test of the real-time attractiveness of states' judiciary during the sample period. In contrast to prior research, we find that Delaware's attractiveness to merging parties has increased in recent years. Parties appear to respond to exogenous events, evidenced by the fact that top-tier legal advisors, foreign acquirers, transactions surrounded by greater financial uncertainty, and larger transactions tend to select Delaware's forum over other venues. We conclude that during our sample period, Delaware was increasingly valued by the corporate actors who influence incorporation choices, and competed strongly for legal products beyond its primary one, the public company charter. This is important because a failure to retain corporate litigation can possibly lead to an erosion in Delaware's prominence in the public company chartering market.

Ancillary